RXO, Inc. Q1 FY2026 earnings call

• Freight market: Supply-driven recovery with capacity exiting, but demand remains soft. Shippers are selective about partners. RXO was recognized with Carrier of the Year awards.
• Business momentum: Broker's full truckload volume improved monthly in Q1, spot mix increased by 500 basis points sequentially in Q1 and again in April, securing major customer wins in brokerage and managed transportation, and accelerating GenTech AI deployment.
• Technology: Made progress on AI roadmap, rolled out AI spot agent in reps' inboxes with promising initial results.

Brokers revenue is $1.1 billion, up 3% year over year, with 74% of total revenue. Cost of transportation increased due to full truckload market tightening. Brokerage gross margin was 11.4%. Complementary services revenue was $388 million, down 7% year-over-year, representing 26% of total revenue. Managed transportation generated $123 million in revenue, down 10% year-over-year. Last small business generated $265 million in revenue, down 5% year-over-year with stops down 8% due to weather. RxO's EBITDA was $6 million in the quarter, at the low end of the range due to severe weather.

• Second quarter EBITDA expected to increase significantly, driven by stronger volume, better spot mix, and higher contract rates in brokerage. Brokerage volume expected to be flat year over year in Q2, truckload volume to resume outperformance mid-year. Complementary services managed transportation results expected to improve, last mile stops expected to be down low single digits year over year. Q2 adjusted EBITDA expected in the range of $27 to $37 million.
• 2026 modeling assumptions unchanged. Full-year 2026 contract rates expected to increase by high single digits, up from prior low to mid single digit growth.

• Severe weather impacted deliveries in Q1, affecting EBITDA. Regulatory changes and enforcement driving capacity exit in freight market. Potential impact of Montgomery case on brokerage industry, including higher insurance costs and shippers' requirements for carrier vetting processes.
• Negative gross margin loads elevated currently, but tied to high margin loads as customers trust RXO and it delivers for them.

Q: What's your spot mix up? I believe you said 600 basis points year over year. So how are you thinking about your strategy at this stage in the cycle? And what company-specific actions are driving your ability to execute on the increased spot volume?

A: Good morning, Stephanie. First, we've got a model built on service. We've got customer awards, are converting a larger pipeline, have solutions like converting customer business from brokerage to managed transportation and new middle mile solutions offering. On technology, using AI to get more efficient. Most important is relationships with customers. Our top customers have been with us for 16 years on average.

Q: As you think about some of the investments that you have and that you just called out, especially at AI and just technology, how do you balance AI and tech investments with your people and your relationships, particularly at this point in this cycle?

A: We value the relationship first. We are a relationship business. We win because of the relationships with customers. Customers come back because of what we've done before and it's the people they do business with. We're using technology to fundamentally change the business and drive more productivity within it. You saw our productivity was up 15% on a year-over-year basis. We see clear ways to improve the relationship off of the technology we're using.

Q: But just looking even at the guidance for 2Q, I think at the high end, earnings are still down year on year. Just what is the right normalized earnings power for this business?

A: We've been very consistent on normalized earnings. At a midpoint in the cycle, this is a mid-single-digit EBITDA business, and at the up cycle, it's a high-single to low-double-digit EBITDA business. Even on our Q2 guide, we are multiples away from what normalized earnings, but we see a clear path, and we see that we're in the early innings of heading towards that.

Q: There are a number of new regulations impacting supply on the TL side, but there are some potential catalysts that may be impacting supply on the brokerage side as well, particularly a renewed focus on chameleon carriers and the potential Montgomery case in front of the Supreme Court. What are your views on how much of an endemic issue is this and what impact there could be for the brokerage industry and maybe even RXO, both as a risk and opportunity going forward?

A: Current regulations are driving higher quality carriers. We've got a robust carrier vetting process. Shifting to the Montgomery case, we think the industry is on the right side. If the case goes the Montgomery side, it will drive out the tail on brokers and create opportunity for organic growth and M&A consolidations.

Q: I want to dig a little bit more onto the spot moves because that seems to be sort of the big piece in the quarter here. So when you think about competitively, where do you think this share is coming from?

A: On the spot market, a lot of times those are open bids, so it's not a clear indication of where it's coming, but we're also not picky on where it comes from. Our goal is to service the customer and make sure that we are the ones they are calling. Tender rejections are still sitting in the low to mid-teens and will continue to rise as capacity exits. We've got a team set up war rooms of different solutions to service customers in the spot market.

Q: I get all the spot mix stuff, but if overall volume in truckload is down 12 and spot mix is up six, I think the math implies that contract volume is down something like mid to high teens. So maybe just some thoughts on why we're seeing such big declines in contract business and how you think about that evolving going forward and maybe just along the same lines. I think you said LTL volume flattens out in Q2, but then reaccelerates, so maybe just color on LTL as well.

A: Demand's still soft. It's a muted environment on the demand side, and so the fill rates are not there. Tender wide rejections are sitting in the low teens. On the LTL piece, we talked about that being roughly flat on a year-over-year basis in the second quarter and we'll get back into growth mode as we get into the back half of the year on that as the pipeline is strong there.

Q: I wanted to drill down on the Montgomery case a bit further. I want to see if you could elaborate a bit further on the mechanism for that pressure on small brokers. If CH and TQL lose the Montgomery case. And then I had one follow-up after that.

A: Again, we think the industry is on the right side of this. If it does not err on that side, insurance costs will be a headwind for smaller players, shippers' requirements will also go up, and carrier vetting processes will be more stringent. Shippers will want to do business with people who have scale, good technology, have delivered for them in the past, and have financial stability. We check all of those boxes. From an insurance market standpoint, insurance carriers will look to brokers who have good vetting processes and are invested in carrier compliance, and it will be harder for smaller players to acquire or procure insurance.

Q: Just on kind of like what the mix of loser loads or, you know, kind of negative gross margin loads looks like. I think, is that pretty elevated right now? And is that something like you see that improve quite a bit as you look forward?

A: Negative gross margin loads are definitely up. The other thing that is also up is our high margin wintering loads that is also up significantly. Those go hand in hand. In 2022, that was our strongest profitability, which was also our highest negative margin load percentage as a business and highest high margin loads during that time period. We look at the customer as a total profitability, not off of one load.

Q: I wanted to go back to this point about truckload volume being down 12% year over year. I was hoping you could help us contextualize that number. Maybe you could give your view on kind of how much the overall market was down relative to that 12% and just help us understand like how much of that was RXO making a deliberate decision to move away from certain loads? How are you moving relative to the market and what gets you back to taking share? We talked about some headwinds in the business heading into it.

A: Off of memory, cash freight index was down around six. And our truckload volume was down around 12. But you also see the rate of change where we talk about it being flattish on a year-over-year basis in the second quarter. The biggest thing driving the rate of change is our conversion on our sales pipeline and seeing a lot more spots. The rate of change exiting from Q1 to Q2 is driven by these factors.

Q: I was hoping you could talk a little bit more about your approach to AI. It sounds like你're getting some traction there. That's great. Obviously, people have responded well to that in the market. Help us understand what it is that RXO is doing different, like how much of your approach to AI is built off of proprietary technology, how quickly you expect it to scale, etc. If you could just give us more color there, I think it'd be helpful.

A: Our AI strategy is built for who we are. It's built to adjust with what's going on in the market. It's built tailor specific for our customers, especially large enterprise customers. We've built new tools as we start to ramp up the SMB parts of our business. We're building things in there on the carrier side. Anything that is customer, carrier, or employee facing, we view as secret sauce. And those things we really want to lean in and use proprietary tools. On the productivity side, we're seeing some real tangible benefits. Productivity in the second quarter was up about 15% when compared to the prior 12 months benefiting from those investments.

Q: You set the scale for EBITDA Outlook for 2Q. Thoughts on maybe seasonality, pace of growth, maybe a little further out, third quarter, full year? And then, Jared, on that last point, as you get more automated on quotes, thoughts on staffing? I don't think you disclosed ad count, but How are you thinking about early efficiency gains on reshaping the workforce?

A: As you know, we give an outlook one quarter at a time, but can certainly provide a little color on Q3. Typically, Q3 does decline when compared to Q2 in last mile. Q2 is the strongest quarter of the year from a seasonal perspective, but would certainly say there's nothing typical about this year. Starting in Q3, you'll see the full implementation of the contract rates. Volume will be a function not only of the market, but also our successful conversion of the pipeline. Managed trans also implementing new awards in the second half of the year. And any sustained increase in demand, including automotive, could be substantially better than that. On staffing, our brokerage headcount was down double digits on a year-over-year basis. Our people matter to this business, but they're going to get more productive over time and the more tools we implement. The rate that we add heads will not be at the rate as we start to outgrow the market, which we've said will start to outgrow the market around the middle of the year, maybe sooner.

Q: Maybe just to follow up on that headcount productivity question, it seems to me like you're in a better position to implement a lot of these tech and AI programs now that the tech stacks are more harmonized. You listed a lot of different initiatives. Maybe if you could just help us to quantify the impact of those, any KPIs that you're seeing in terms of productivity or GP per head or maybe margin contribution that you can give us to help kind of illustrate what the impacts might be to the bottom line.

A: On the productivity side, we're seeing some real tangible benefits. Productivity in the second quarter was up about 15% when compared to the prior 12 months benefiting from those investments. And I'll go back to those four key pillars that we talked about earlier in terms of how we think about our technology strategy across volume, margin, productivity, and service. And the one tool that we've been talking about that we're quite excited about is some of the benefits that we're seeing from the agentic AI email spot code functionality. because not only does it enable incremental volume and margin opportunity, it comes with a pretty strong contribution margin to the business. So as we think about scaling the business longer term, decoupling volume growth from headcount, it could really add some pretty strong contribution margins longer term.